Pensions minister suggests a 12 month “cooling off” period for new pensioners
to find a better deal as he warns of tougher laws to stop thousands being
ripped off each year

Middle-aged workers would have to “shop around” for the best pension deal before they retired under radical plans to stop hundreds of thousands of pensioners being ripped off by insurance firms every year.

Steve Webb, the pensions minister, believes the current system of self regulation has failed and says he will consider “very seriously” any recommendations to change the law to enforce more competition.

One option would be to give newly retired workers a 12 month “cooling off” period in which they could change their mind if they find a better deal after signing up to a pension.

More extreme proposals could include banning people from buying a pension from the company with which they have built up a lifetime of savings.

It follows report last week from the Financial Conduct Authority (FCA) which found that the pensions market was “broken”. It said insurers were denying savers the best pension deals by failing to encourage them to shop around when they retired, meaning many were left trapped in poor value schemes until they died.

Speaking to The Telegraph in the wake of the report, Mr Webb said he had already held informal discussions with pension firms about reforming the way the annuities market operates to ensure everyone looked around for the best deals.

“If self regulation had worked, we wouldn’t be in this situation,” he said. “Although in theory people are encouraged to shop around there is still an in-built bias against it. We do need to reorder the way choices are made.

“Roughly half a million people are buying annuities a year. When you add it all together there is a substantial loss to retired people from all of this.

“We know people don’t save enough for pensions, and that just makes it all the more pressing that we get every last penny out that we can.”

Mr Webb’s comments represent the Government’s first detailed response to last week’s landmark report last week from the FCA.

The watchdog found that savers were being left thousands of pounds worse off in retirement because they were not “shopping around” for the best deals before signing up to annuities schemes that lock them in for life. The report said the pensions annuities market allowed insurers to make “significant” profits at the expense of their customers.

The regulator will now hold a year-long competition investigation into the annuities market to establish how insurers are able to continue to exploit their customers so easily.

“There have been a lot of attempts at self regulation,” Mr Webb said. “Sometimes self-regulation will only get you so far. I can’t pre-empt what the FCA will say but they may well recommend legislative or regulatory solutions.

“Clearly, if the FCA recommend regulation or legislation, there is no doubt that the government would look very seriously at that.”

Currently, most people are forced to use their pension savings to buy an annuity, which pays an annual income for the rest of their lives. For many people, it is the biggest financial decision they will ever make.

However, in recent years annuity rates have plunged, trapping many people in poor-value schemes that have destroyed the value of their lifetime savings.

The Telegraph disclosed last month that Mr Webb was drawing up plans to allow pensioners to switch annuity deals in the same way that home-owners can change mortgage deals every few years.

He received a critical response from many in the pensions industry at the time. However, some companies have already begun modeling how such a system would work.

Mr Webb said one plan which one pension provider had privately suggested would enable newly retired people to take a one-year pension and then switch to a better deal if they find a more appropriate scheme after 12 months.

A 12-month “cooling off period” would give new pensioners the time they need to consider which pension deal is best for them, once they have established how much money they need for household bills such as petrol and groceries.

“You could very easily have a product whereby you have got a pension for a year but you weren’t making that long term commitment until 12 months in,” Mr Webb said. “It’s almost a cooling off period. It takes a little while after you have retired to know what your income and what your outgoings are going to be.”

Mr Webb said there were “in-built” problems that make it more difficult for people to shop around.

“If you literally retire from your job and then need to live on your pension, you can’t afford a gap,” he said. “You’re coming up to your retirement do, it’s your last month in work, you’ve got your final pay packet, you need something within four weeks so you start to think about your pension. Suddenly you’re thinking, I need the money.

“So actually there is an in-built problem with shopping around, sending off the paperwork with proof of identity and bank details to another provider. Although in theory people are encouraged to shop around there is still an in built bias against it.”

Pensions experts have called for urgent and radical changes in the law to restructure the annuities market.

Proposals could include requiring customers to sign a form saying that they have taken quotes from three different insurers before deciding on an annuity package.

A more extreme option would be to ban pensioners from buying annuities from the company they have saved with. This would result in a major restructuring of the industry.

Other possibilities include requiring pension firms to notify customers of their options five years before they retire, instead of writing to them a few months before retirement.